Ask the Institute

DATE: June 17, 2013

QUESTION:

Is there a simple formula a trader can use to calculate the probability that a stock price might touch a certain level on or prior to a particular date?

ANSWER:
Unfortunately, there is no simple calculation for "probability of touching" as this is a very complex topic. Probabilities of touching involve the use of calculus and the standard normal distribution function, also known as the bell-shaped curve. Perhaps two of the more important probabilities of touching for traders to become familiar with are (1) a 99% chance of touching 1/2 standard deviation and (2) a 54% chance of touching 1 standard deviation. Of course, trading decisions should be based on many factors, but probability calculations may also be a helpful input. To learn more about probabilities based on Volatility, view this week's segment of "Ask the Institute."